A transform approach to compute prices and Greeks of barrier options driven by a class of Lévy processes

In this paper we propose a transform method to compute the prices and Greeks of barrier options driven by a class of Lévy processes. We derive analytical expressions for the Laplace transforms in time of the prices and sensitivities of single barrier options in an exponential Lévy model with hyper-exponential jumps. Inversion of these single Laplace transforms yields rapid, accurate results. These results are employed to construct an approximation of the prices and sensitivities of barrier options in exponential generalized hyper-exponential Lévy models. The latter class includes many of the Lévy models employed in quantitative finance such as the variance gamma (VG), KoBoL, generalized hyperbolic, and the normal inverse Gaussian (NIG) models. Convergence of the approximating prices and sensitivities is proved. To provide a numerical illustration, this transform approach is compared with Monte Carlo simulation in cases where the driving process is a VG and a NIG Lévy process. Parameters are calibrated to Stoxx50E call options.     

Accuracy of Premium Calculation Models for CAT Bonds—An Empirical Analysis

CAT bonds are of significant importance in the field of alternative risk transfer. Because the market of CAT bonds is not complete, the application of an appropriate pricing model is of high relevance. We apply different premium calculation models to compare them with regard to their predictive power. Without taking the financial crisis into account, a version of the Wang transformation model and the linear model are the most accurate ones. In contrast, under consideration of the financial crisis, all analyzed models are approximately equivalent. Furthermore, we find that CAT bond specific information does not improve out‐of‐sample results.     

Meeting in the middle: joining reflection and action in complex public sector projects

In order for co-production to become a viable way of working in public sector management and policy-making, practitioners need to be more reflective and researchers need to be more action oriented. This article discusses reflective practice, action research and the idea of a community of inquiry in which both practice and science work together. The authors illustrate their ideas with an example from their own practice and explain the advantages of their approach.     

Why Managers Use Cost Allocations: A Research Note

Using an experimental design, this paper investigates empirically the conditions under which managers use cost allocations for decision-making purposes. The paper focuses on decision-risk in the context of short-term decision-making when most capacity costs are unavoidable. Decision-risk is determined in this paper by a combination of two factors: uncertainty and irreversibility. Cost allocations can serve as a reference point for a decision maker to deal with decision-risk. Three hypotheses are formulated: (1) the combination of both uncertainty and decision irreversibility induces the use of cost allocations. However, (2) certainty or (3) decision reversibility alone are not expected to induce the use of cost allocations. The hypotheses were tested in an experiment, in which senior managers participated. The experimental results supported the hypotheses.     

Competition in the presence of individual demand uncertainty

This article offers a tractable model of (oligopolistic) competition in differentiated product markets characterized by individual demand uncertainty. The main result shows that, in equilibrium, firms offer advance purchase discounts and that these discounts are larger than in the monopolistic benchmark. Competition reduces welfare by increasing the fraction of consumers who purchase in advance, that is, without (full) knowledge of their preferences.     

Joint Management of Emission Abatement and Technological Innovation for Stock Externalities

We investigate how emission abatement and technological innovation provide different solutions to reduce pollutant emissions. In the case of a stock externality emission abatement leads to a smooth and continuous adjustment of emissions. Conversely, technological innovation has to be interpreted as an option on a less polluted environment and can justify the use of a pollution threshold above which it is optimal to start a research and development programme for a less polluting technology. It is shown that technological innovation interferes with the traditional emission abatement approach. The optimal abatement level is logically lowered once the less polluting technology is available; nevertheless a temporary increase in emissions is optimal during the research and development period. The usual Pigouvian tax system proves to remain an efficient corrective instrument. A numerical application to the Greenhouse effect is provided.     

Creative Destruction, Investment Volatility, and the Average Age of Capital

In this article, a new numerical procedure is used to compute the equilibrium of a vintage capital growth model with nonlinear utility, where the scrapping time is nonconstant. We show that equilibrium investment and output converge nonmonotonically to the balanced growth path due to replacement echoes. We find that the average age of capital is inversely related to output, which is consistent with recent micro evidence reinforcing the importance of the embodied question. We also find that an unanticipated permanent increase in the rate of embodied technological progress causes labor productivity to slowdown in the short run.     

Regional Determinants of Small Firm Loans Under the U.K. Loan Guarantee Scheme

The Loan Guarantee Scheme was initiated in 1981 in order to alleviate a perceived constraint in the ability of small firms to secure bank finance due to a lack of collateral. This paper shows that a national small firms support scheme has, at the point of delivery, had quite different coverage across regions. Briefly, the initial evidence suggests that the Northern regions of England have been the major net beneficiaries of the scheme, primarily at the expense of Northern Ireland and Scotland. Further analysis identified house prices as the single most important determinant of loan size, acting via a collateral effect. On loan numbers and value, fixed regional effects were dominant particularly in the South East and North West.